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LONDON (Dow Jones)--The London Metal Exchange aluminum market is in a"serious correction mode" with a further 5% of the price accounted for by fundsyet to exit the market, according to James Southwood, President of U.S. metalsconsultancy Commodity Metals Management Company.

These funds players are termed "for profit" players by Southwood, who saysthere's been "a huge financial transformation in that the mainstream financialinstitutions have made a long-term investment in commodities."

"We're in the phase of this investment now where the smart money - the earlyinvestors like the commodity trade advisory players or the macro hedge funds -is getting out and handing the market to the general public, such as thepension funds," he said.

"I'm not saying there's not money to be made, but we're in a cyclicalcorrection and these corrections will become increasingly volatile as the smartmoney gets in and out of the market," he added.

Southwood said that the 'not for profit', pension fund type investors, whohave adopted an "alternative investment class concept towards commodities, stayin the markets for years regardless of the near-term result."

LME three-month aluminum prices fell to a low of $2,425 a metric tonWednesday, down 26% from the May 11 high of $3,300/ton. The sell off came aspart of a broader corrective move lower in the financial markets, particularlythe commodity, equity and emerging markets.

But the fundamentals for aluminum are still relatively strong, Southwoodsaid.

"Alumina prices are admittedly softening but that's all part of the changesin Chinese production that are affecting the supply-demand balance. Loweralumina prices are a reality," he said.

"Right now, with aluminum at its first point of support, around $2,450 ametric ton, we'll likely see a bounce as we're still in a very strong part ofthe business cycle. As the summer months progress in the western hemisphere,seasonal factors will slow demand and as this occurs, we can expect aluminumprices to come down again," he noted.

"But again, this will likely be short-lived and it wouldn't be unreasonablefor the market to return to close to its former levels, around $3,000/ton, oncemore," Southwood added.

This bounce will come because the LME aluminum market isn't short, Southwoodsaid; "if it were, aluminum prices would be a lot lower than they are now."

"Because there are obviously still long positions out there, we believe thatthere's more upside to aluminum prices. When the market does go short we'll seeanother leg down in prices," he added.

The recent sell off has come as investors downgrade their expectations ofglobal growth in response to interest rate hikes in Europe and the U.S. andtough inflation talk by the U.S. Federal Reserve.

But Southwood said changes in the macroeconomic environment will take sometime to filter through to the attitude of the funds.

"It takes a few years for the impact of macroeconomic changes to affect thefunds. We'll see much lower aluminum prices in a year or so from now, wheneconomic conditions are a lot softer," he added.

While Southwood doesn't object to the presence of the funds in the commoditymarkets - "they have the same objective as commercial customers: to make aprofit," - he does object to their size. "What we do object to is the size thefunds represent relative to the industry at large," he said.

"The speed at which the commodity markets react is so much faster thanpreviously. You have to forecast three or four quarters in advance in order tobe able to make good price predictions," he said.

"The ability to reinterpret this into the present causes some of the currentvolatility. It's a reflection of how aluminum has become less of anindustrialized commodity and more like a financial market," he added.